What is wrong with Acreage Holdings (ACRE)? Since the beginning of the year the stock has fallen about 10 percent. All this time, the average cannabis stock has shot up over 52 percent. The company just reported Q4 results, so maybe there are some clues to be found in the financials.
Headquartered in New York City, Acreage presents itself as the largest vertically integrated, multi-state owner of cannabis licenses and assets in the U.S. The company counts 19 states where it cultivates, processes, and dispenses products. In 2018 Acreage launched its national retail brand, The Botanist.
Here are the numbers
Fourth quarter 2018 revenues increased 380 percent to $10.47 million, bringing the full year to $21.1 million. Considering the business is solely U.S. based, thus receiving no bump in demand from Canadian legalization, these numbers were good. When you add this to the fact the company had no dispensaries in California, the numbers start to really impress.
Every bit as important is the upward trend in gross margins, reaching 42 percent in Q4. This marks a sharp upturn compared with 38 percent in last years quarter. Overall 2018 posted GMs of 39 percent. So things are clearly improving on this score.
The picture changes when considering a Q4 operating loss of $69 million, about nine times the year’s early level. Acreage management can be excused for losses as they rapidly grow the business.
During the fourth quarter of 2018, Acreage opened two dispensaries under its The Botanist brand in Buffalo, NY and Worcester, MA, and acquired one dispensary in Thames Valley, CT, ending the year with 19 dispensaries.
With the March 12 release of earnings, ACRE announced an agreement to acquire 100 percent of California-based Kanna, Inc., which holds a license to operate a cannabis dispensary in Oakland, CA. This marks the first dispensary operating license for Acreage in the largest cannabis market in America. Altogether, the company now operates 24 dispensaries.
Like just about every other company in the cannabis business, Acreage’s ambitious growth requires a boat load of capital. In the current deal-frenzied times, no amount of capital is too much. On this measure, ACRE seems to be keeping up with the pack.
At year end the balance sheet showed $250 million in cash and equivalents. Total liabilities were just $65 million. The current cash burn of $69 million will likely increase further. Even so, management still has a fair amount of wiggle room.
In terms of capital resources, ACRE completed a $314 million private placement last year. Total investment spending amounted to $202 million, however only $70 million was deployed in cash with the balance using stock ($99 million) and debt ($33 million). It is always a good sign when a company can tap into multiple resources to finance growth. And, this is even more impressive when considering it takes place in the cannabis business.
The ACRE fan club
Conventional measures of value make little sense when applied to industries with exploding opportunity. Acreage’s market cap at $1.9 billion is roughly 90 times 2018 revenues. The company will continue to lose money at least through the present year and will need a further injection of dough in the next two years. So, common shareholders have cause to expect future dilution.
This cautionary note can be applied to more than 90 percent of all publicly held equities in the business of THC and CBD. In the short term, valuation can be based on a company's following in the investment community and where the stock is traded.
ACRE gets a B+ in both of these categories. According to MarketWatch, five analysts cover the company, of which four rate the stock a buy and one recommends overweighting the stock. As recently as mid-December only one buy recommendation existed. So even though the stock has seriously lagged it’s peers, analysts are all pretty happy with Acreage fundamentals.
And finally, on November 14 of last year the subordinate voting shares of Acreage Holdings, Inc. were approved for listing on the CSE. Between an admiring investor group and the CSE listing, it isn’t easy to explain the stocks miserable performance. Is it possible for a company with a market cap near $2 billion to be “undiscovered”? That is probably stretching things, but there is some truth, nevertheless.